What is an NPO?
A non-profit organization (NPO) is an organization established for purposes other than generating a profit. No part of the organization's income is distributed to its members, directors, or officers.
In other words, an NPO is made for some charitable purpose beneficial for the general public or any class. Revenues and surpluses generated by NPO are used for welfare activities for the public. They do not provide for any person's benefit, as reflected in Section 2(36) clause (c) of the Income Tax Ordinance, 2001.
Section 2(36) of the Income Tax Ordinance, 2001 defines NPO as:
2(36) “The Non-profit organization” means any person other than an individual, which is:
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Established for religious, educational, charitable, or welfare purposes for the general public or the promotion of an amateur sport
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Formed and registered by or under any law as a non-profit organization
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Approved by the Commissioner for a specified period on an application made by such person in the prescribed form and manner, accompanied by the prescribed documents and, on requisition, such other documents as may be required by the Commissioner
And none of the assets of such person confers or may confer a private benefit to any other person.
How to establish an NPO?
In Pakistan, three options are available for establishing a non-profit organization. These are:
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A society registered under the Societies Registration Act of 1860 (the “Societies Act”)
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A company registered under Section 42 of the Companies Act, 2017 (the “Companies Act”), previously the Companies Ordinance, 1984
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A trust created under the Trust Act (the “Trust Act”)
Society Registered under the Societies Registration Act of 1860
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The Societies Act provides for the registration of, inter alia, charitable societies, societies established for the promotion of science, literature, or the fine arts, the diffusion of practical knowledge, and the diffusion of political education. Any seven (7) or more persons associated for any of the purposes enlisted under the Societies Act may, by subscribing their names to the Memorandum of Association and filing the same with the Registrar of Joint Stock Companies, form themselves into a society under the Societies Act (Section 1)
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On registration, the societies would assume a legal personality capable of acquiring/holding property suing and being sued (Sections 5 and 6 of the Societies Act). The money & property belonging to society, if not vested in the trustees, is deemed to be granted to the governing body, and the management of the affairs of a society is also entrusted to the governing body (Section 16 of the Societies Act).
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The memorandum of association defines the scope of the society's activities and relations with the outside world. The rules and regulations of society are generally made to carry out the objects of the community and for its internal management. If the rules and regulations of the society are inconsistent with the provisions of the Societies Act, the requirements of the latter shall prevail.
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To dissolve a society, the consent of three-fifths (3/5) of its members is mandatory (Section 13). On dissolution, unless the society was formed and financed through the members' personal funds, the surplus left after meeting the society's liabilities is to be given to some other society as decided by the three-fifth (3/5) majority of its members. In default, the principal Court of the original civil jurisdiction of the district (Civil Court) can do the same (Section 14).
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Under Section 16-A of the Societies Act, the Provincial Government can suspend the governing body of a society for a specific period not exceeding one (1) year and assume control of the society in the event of circumstances mentioned in Section 16-A. On the expiry of the said period, the society's governing body is reconstituted under its Memorandum of Association and the Rules and Regulations.
However, the Provincial Governments rarely exercise such powers, and a society registered under the Societies Act, for the most part, functions with minimal interference from the Government. In general, it has only to report, once (1) a year, the list of its governing body, performance report, annual audit report, and minutes of the annual general meeting to the registering authority (Section 4).
A company incorporated under Section 42 of the Companies Act.
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Section 42 of the Companies Act provides for the licensing by the Securities and Exchange Commission of Pakistan. The “Commission” of associations for promoting commerce, art, science, religion, health, education, research, sports, protection of the environment, social welfare, charity, or any other valuable objects, which apply or intend to apply their profits, if any, or other income in promoting their objects, and prohibit the payment of any dividend to their members.
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The Commission grants a license on such conditions and subject to such rules as the Commission thinks fit. It allows the company to be registered as a limited liability while dispensing with the use of the words "Limited" or "(Guarantee) Limited," as the case may be, at the end of its name.
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The company, on registration, enjoys all the privileges of a limited company and is subject to all its obligations (Section 42(4)). The Commission may revoke the license on several broad grounds provided in Section 42(5) after giving written notice and an opportunity for a hearing to the licensee (Section 42(5)). This power has, however, to be invoked on bona fide considerations, and though not explicitly stated, such an order has to be a speaking one to align with the principles of natural justice (see generally, Section 42 of the Companies Act and Rule 6 of the Companies (General Provisions and Forms) Rules, 1985 (the “Rules”).
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A company incorporated under Section 42 of the Companies Act must comply with several statutory filing requirements.
Trust Incorporated under the Trust Act.
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Registration and regulation of a Trust were previously governed under the Trusts Act of 1882. New laws governing Trusts were enacted in 2020, whereby each province now has full autonomy regarding trust registration and other trust-related deeds under the amendment. They are:
- A trust is an obligation annexed to property ownership, arising from confidence reposed in and accepted by the owner. Or It was declared and taken by him for the benefit of another and the owner.
- A trust can be created by any person competent to contract. Words or acts can build trust. However, a trust concerning immovable property must be in writing and registered. The author of the trust must transfer the trust property to the trustee unless he is to be the trustee or the trust is declared by will. Thus, the trust property, movable or immovable, vests in the trustee, and he is the legal owner.
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On transfer of property or any interest to the trust, the property or such interest can only be utilized for the trust. No part of any income generated by the trust property can be distributed directly or indirectly by way of profit, bonus dividend, or otherwise to any third person.
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Every person capable of holding property can be a trustee. The trustees must execute the trust according to the author's directions. They are also put under statutory obligations contained in the Trust Act and are liable for the breach of their duties.
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Every person capable of holding property can be a beneficiary. Beneficiaries can compel the trustees to execute the trust.
Income Tax and Non-Profit Organizations
The Income Tax Ordinance, 2001 (the “Income Tax Ordinance”) and the Income Tax Rules, 2002 (the “Income Tax Rules”) enable certain tax benefits to non-profit organizations. Section 2 (36) of the Income Tax Ordinance and Rules 211 to 214 of the Income Tax Rules extend tax benefits to all "approved" non-profit organizations in Pakistan established for religious, charitable, or educational purposes under any law.
NPOs and Charities Registration
In line with FATF recommendations and policies aimed at preventing the misuse of NPOs for the financing of terrorism while, at the same time, respecting legitimate actions of NPOs, charities are mandatorily required to be registered under the provincial charities legislations where the NPO or charity is undergoing charitable activities.
Every NPO or charity is now required to be registered with the charity commission of the province. In non-registration, such charity or NPO shall not be allowed to collect donations or funds to work the NPO.
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For NPOs with charitable activities in Punjab, the NPO must be registered with the Punjab Charity Commission under The Punjab Charities Act, 2018.
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For NPOs with charitable activities in Sindh, the NPO must be registered with the Sindh Charities Registration and Regulation Commission under The Sindh Charities Registration and Regulation Act 2019.
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For NPOs with charitable activities in Khyber Pakhtunkhwa, the NPO must be registered with the Khyber Pakhtunkhwa Charities Commission under The Khyber Pakhtunkhwa Charities Act, 2019.
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For NPOs with charitable activities in Balochistan, the NPO must be registered with the Balochistan Charities Registration & Regulation Authority under the Balochistan Charities (Registration, Regulation, and Facilitation) Act, 2019.
This registration provides legal cover to the charity or NPO. It is a way in which the legitimacy and authenticity of a charity are checked. This registration has been made compulsory to reduce fraud and combat the financing of terrorism. A charity or NPO has to go through extensive checks and scrutiny to be approved by the Provincial Charity Commission.
